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World Development book case study: mining in Mongolia

Mega-mining in Mongolia – A development bonus or resource curse?

China’s increasing demand for energy to fuel its economic growth has been well documented. Although it has the largest green energy programme in the world it is also the largest greenhouse gas contributor and coal is important for industrial and domestic use. There are insufficient reserves in China to meet demand and so huge quantities of coal are imported. The discovery of vast reserves of coal, and other minerals, in neighbouring Mongolia provided a clear opportunity for China and it is making the most of it.

The case study has the usual conflicts between local and national interests but a further consideration is the additional long-term impact of the exploitation of these huge coal reserves on global climate change. China’s priority is stable economic growth and, although it is keen to show it is playing its part in helping the world move to a low-carbon global economy, it is still the biggest emitter of greenhouse gases.

Key facts

Mongolia:

  • Population: 2.7 million (UN, 2010)
  • Capital: Ulan Bator
  • Area: 1.56 million sq km (603,909 sq miles)  (UK area 245,000 sq km)
  • Major language: Mongolian
  • Major religion: Buddhism
  • Life expectancy: 65 years (men), 71 years (women) (UN)
  • Monetary unit: 1 Togrog (tugrik) = 100 mongos
  • Main exports: Copper concentrate, dehaired cashmere, textiles, hides
  • GNI per capita: US $1,630 (World Bank, 2009)

Mongolia is a large, landlocked and sparsely populated country which spreads over the Central Asian Plateau. It has an extreme climate with very high annual and diurnal temperature ranges and the vegetation is steppe and semi-desert. A third of the population live in Ulan Bator but 40% of the workforce are engaged in the herding of livestock over extensive pasturelands. During the past decade, a series of unusually severe zuds – storms that turn winter snow cover into solid ice, causing the mass starvation of livestock – has had a devastating effect. The bitterly cold winters and periodic drought have caused an increase in urban migration and changed the traditional way of life.

Mongolia is a poor country and development progress has been slow in spite of the relatively generous assistance it has received from donor countries and the IMF. The United Nations estimates that 27% of Mongolia’s urban population lives below the poverty line. In rural areas, nearly 50% of people live in poverty. Its sparse population and high levels of corruption have been a hindrance but the opportunity to exploit its mineral resources has totally changed the economic outlook for the country. It is the discovery of huge reserves of high-grade coal that is likely to have the greatest impact although copper and gold will also be important.

Mongolia’s government may safely be described as pro-mining. It wants to develop the mineral resources of its country – and it expects to gain significant economic, social and political benefits from expansion of the mining sector. Government officials want the $5 billion coming into the Oyu Tolgoi copper and gold project, and they want the massive Tavan Tolgoi coal project, the Boroo hard rock gold mine, the copper and molybdenum operation at Erdenet-Ovoo, and another copper/molybdenum mine, the Tsagaan Suvarga. They want the Nalayh coal mine in the north, the Oyut Ovoo in the south-central part of the country, and the Zaamar gold mine dredging operation on the Tuul River. They want the Dornod uranium mine and the Asgat silver mine. The Mongolian government wants revenue from its recently renewed uranium exploration and extraction ventures with Russia and Japan. - Brian Awehali, The Guardian, 11 January 2011.

The largest coal site, Tavan Tolgoi, has high-grade coal deposits estimated at six billion tonnes. The deposit is rich in coking coal, needed for the production of steel. China is the world’s largest steel producer and is only a short distance away across the border. Around 85% of Mongolia’s trade is with China. Although most of the coal is destined for the China, there are plans to build a 1,000-kilometre (621-mile) rail link to Russia, where the coal can be sent along the Trans-Siberian railway to Far East ports, providing Mongolian coal with access to Japan, Korea and Taiwan. The coal mining has already generated wider economic activity with the building of power plants and coal-washing plants.

Some of the world’s biggest mining companies are involved in attempts to get access to the coal extraction, including Ivanhoe Mines based in Canada, Peabody Energy of the US, China’s Shenhua and a large Russian consortium. The state-owned Erdenes Tavan Tolgoi (ETT) holds the mining licence and extraction rights are to be auctioned off to the highest bidder. Constructing the mines will require billions of dollars and the plan is to sell shares of ETT on the open market to raise funds.

The money generated by mining is expected to triple the national economy by 2020 and drive the living standards of the 2.6 million population into the global middle class. There are, however, many concerns about whether profits from the mining will benefit the poor majority of the population or go into the pockets of a wealthy minority with political and financial influence. The signals so far in Mongolia are mixed. The government has given most of its Human and Development Fund (derived from mining) as cash hand-outs to the population to secure electoral votes. The government claims that there will be a major change in the future, with more money going on health insurance, public housing and education. It has also promised every citizen 536 shares in the new company formed by the selling of shares in ETT as a way of giving all its population an investment in the development of the country’s natural resources.

At the moment the coal is being transported from the mine by 2,000 off-road 100-tonne trucks a day and the dust created on the dirt-track roads has caused major local problems. The dust is so thick that the trucks often have to drive with their lights on during the day and local herders claim that the dust is poisoning the pasture their animals feed on. The herders also blame mining activity at Tavan Tolgoi for the drying up of wells and increasing health problems amongst the local population.

Mongolia mines map http://www.guardian.co.uk/
Mongolia mines map http://www.guardian.co.uk/

Oyu Tolgoi is a copper supermine that is due to start operations in 2012. The mine is operated by Ivanhoe Mines and Rio Tinto. Ivanhoe is 50% owned by Rio Tinto – a UK-based mining transnational. The mine is expected to produce 450,000 tonnes of copper every year for the next 50 years and the total output will be worth about $200bn at today’s prices.

The economic advantages to the region of mining are obvious but there are many concerns about the environmental impact of mining on such a large scale. Water usage is a particular concern with Oyu Tolgoi planning to use 920 litres of water per second for the next 30 years. During construction, surface water has been used and the mining companies admit that this has had a detrimental impact on local herders. They plan to extract and treat saline water from a fossil aquifer which they claim is not linked to any lakes or watering holes.

It’s very unlikely that there’ll be an impact, but we will continue to monitor the situation carefully. The water will be recycled under the company’s zero-discharge policy. We’re doing just about everything we can. It’s the right thing to do and it’s good for business. There is not a lot of water in the Gobi. This is a non-replenishable resource so it is in everyone’s interests to conserve water. If we don’t, we go out of business. - Shea O’Neill, Oyu Tolgoi principal environmental adviser for Rio Tinto, The Guardian, 7 November 2011.

Rio Tinto has pledged to build an asphalt road to reduce dust, with underpasses for migrating animals, and it has also promised to recycle much of its water. Some conservationists have praised the company’s plans and for its willingness to create ‘biodiversity offsets’ to make-up for the damage to nearby eco-systems and wildlife. Others have, however, pointed out the extra threats that will inevitably come from the opening up of new mines and the building of roads and electricity transmission lines that are planned for the region.

I have seen Oyu Tolgoi grow bigger and bigger. When it started, it was just one tent. Then three, then ten. Now look at it. They are even taking our grasslands to build a new airport. In the future, there will be more dust and less water. It will be impossible for us to stay here. - Byunjargal, matriarch of a nomad family that has herded Bactrian camels and cashmere goats in the area for generations, The Guardian 7 November 2011.

Some outside observers are not optimistic about Mongolia’s ability or willingness to control the environmental impact of such large-scale mining activity. According to the World Bank:

‘Mongolia’s deteriorating environmental situation is exacerbated by irresponsible vested interests, poor co-ordination among ministries and agencies, inadequate monitoring of natural resource conditions and weak enforcement of environmental regulations.’

Countries that have sudden access to increased wealth because of the discovery of a resource have a mixed record in development terms. The potential problems are described on page 72 of the World Development textbook and are sometimes referred to as the ‘resource curse’ or ‘Dutch Disease’. The discovery of oil in the Niger Delta is a good example of the problems that can occur. The value of the country’s currency can be chronically inflated by the money generated by the resource, which makes imported goods cheap but makes it difficult to export other products from the country and impossible to diversify the economy. The over-dependence on the resource is often combined with a failure to distribute the wealth evenly within the country. The result is increased social and economic disparity and continued low levels of development. Nigerian oil exploitation is often contrasted with the situation in Norway. The Norwegian government took a long-term view and controlled the extraction rates of its offshore oil. It also developed an oil-based wealth distribution scheme to make certain that the whole population benefited from the oil riches.

Whether we end up as Norway or Nigeria remains an open question.  The key is to avoid rash decisions. It’s not a slam dunk – but I think, over the long term, as long as we are not rushing to develop these resources, I think the country will be prosperous. - Bold Ulan Bator Mongolian entrepreneur, BBC News, 21 April 2011.

Links to related articles.

Brian Awehali, The Guardian, 11 January 2011, for more details about the environmental impact of mining.

http://www.guardian.co.uk/environment/2011/jan/11/mongolia-wilderness-mining-boom

Jonathan Watts, The Guardian, 7 November 2011, an update on the mega mines

http://www.guardian.co.uk/environment/2011/nov/07/gobi-mega-mine-mongolia

Michael Kohn, BBC News, 21 April 2011, highlights global investment in Mongolian mines

http://www.bbc.co.uk/news/business-13078336

Reuters article about unrest caused by the death of a herder who was hit by a coal truck

http://uk.reuters.com/article/2011/06/01/china-innermongolia-idUKL3E7H11QT20110601

Article from the Los Angeles Times about the social and environmental impact of mining in Mongolia

http://articles.latimes.com/2011/jun/02/business/la-fi-china-coal-20110602

Key facts about Mongolia from the BBC News site

http://news.bbc.co.uk/1/hi/world/south_asia/country_profiles/1235560.stm